Ten people were arrested yesterday in a series of raids by counter-terrorism police targeting the alleged funding and support of the insurgency in Iraq.

A total of 500 officers carried out raids on 19 addresses across England, including the offices of an Islamic charity which is accused by the United States of funding international terrorism and of ties to al-Qaida.

Police said they could not rule out that money from Britain was being used to fund suicide bomb attacks in Iraq against UK and US forces and against civilians.

The operation, which involved MI5, was led by Greater Manchester police, and followed a year long investigation.

Three people were last night being held under the Terrorism Act, and five people were arrested under immigration powers and face deportation because they allegedly threaten national security. Two people were arrested and then released without charge.

All those arrested were of Libyan origin. Police raids occurred in London, Bolton, Birmingham, Middlesbrough, Liverpool and Manchester.

At the centre of the raids was a British-based charity called Sanabel, which says it raises money to aid Muslims around the globe.

In February the US Treasury department froze its assets, alleging Sanabel raised money for the jihad, and for the Libyan Islamic Fighting Group, which in turn is accused of links to al-Qaida. One of those arrested yesterday under immigration powers was Tahir Nasuf, 44, who is listed by the Charity Commission as a trustee of Sanabel.

Sanabel offices in Birmingham and Manchester and its personnel are believed to have been monitored by anti-terrorism officers for some time before yesterday's raid. Last night computers and financial documentation were being examined by officers for possible links to terrorism - links the charity says do not exist.

In February, after the US published allegations against the charity, Mr Nasuf said: "It is wrong what they said. I am just a volunteer worker. There is no relationship, nothing at all. I have done nothing. Sanabel is nothing to do with the other group. I am angry."

Yesterday, outside Mr Nasuf's Manchester home, his sister-in-law said the raid had terrorised the family. "My sister told me that before fajr [early morning prayer] policemen came to the house dressed in black. She was very scared, she has four children, and didn't know what was going on.

"There was lots of shouting. They took her husband away, she doesn't know why. He's been arrested before and he had done nothing wrong then."

Charity Commission records show that in the financial year ending in 2004 Sanabel spent around £44,000 on work it described as providing clean water and education to children in the developing world.

The Guardian has learned that the raids came amid mounting concern among counter-terrorism officials that funding and support for the Iraqi insurgency is coming from Britain.

A counter-terrorism source said that investigations into fund raising are finding that time after time money is going to Iraq, which the source described as a "hotspot for us". The source said: "People involved in jihad need to have money to live and travel. Money is also needed for bombs and other jihad activity."

Michael Todd, chief constable of Greater Manchester police, said the raids were not connected to any threat to the UK. "We are talking about the facilitation of terrorism overseas. That could include funding, and providing support and encouragement to terrorists.

"This is an intelligence-led operation. We have been gathering intelligence, together with our security service colleagues, for at least a year, looking at the funding and support of terrorist activities overseas."

Eyewitnesses to the raids described dramatic scenes. Leo Paredes, 27, a student, was woken at 3am by the sound of police breaking down his neighbour's door in south Manchester.

He said eight officers in black clothes and wearing masks knocked through the front door while others went in the back. "They were smashing the front door with a battering ram to try to break it down," he said. "It was like a movie."

Hassan Amiri, 17, who lives next door to the address that was raided, said he was woken at 3am by police shouting at the back of the house.

"I looked out of the window and there were six or seven armed police officers in black uniforms at the back of the house next door shouting 'Stand where you are'. I didn't know what was going on until I heard on the news that it could be terrorism. You don't expect that in your neighbourhood."

The Libyans arrested yesterday are not the first to be detained for allegedly threatening national security. A leading British Libyan dissident yesterday claimed Britain was being duped by the Libyan regime into arresting its opponents.

Ali Zew, from the the National Conference of the Libyan Opposition, said: "The regime can feed false information to Britain, and the regime has done so in the past. Libyan dissidents in the UK have no connection to terrorism, they are just against the regime."